rkmoon
New member
Basel II Capital Accord
The Committee circulated the revised version during June 2004 (called Accord II), for adoption by the Central Banks in different parts of the world according to priorities of the respective central banks. The fundamental objective behind this revision is to further strengthen the soundness and stability of the international banking system. The committee expects its implementation, in stages, to commence from end 2006.
Focus : A significant innovation of the new framework is the greater use of assessment of risk provided by banks' internal systems as inputs for capital calculation. Being more risk sensitive than the 1988 Accord, it is believed that this will lead to adoption of stronger risk management practices by the banking industry world over, which will be a major advantage for the financial markets.
Capital requirement /ratio: Under the Accord, the capital requirement (called capital charge) is to be calculated for credit, market and operational risk. While the definition of regulatory capital remains same (Tier I and II), the measurement of risk assets has been modified for credit risk and operational risk but for market risk there is no change. The minimum requirement continues to be 8% calculated as : Capital Fund (Tier I & II) / (Credit risk + market risk + operational risk). Tier 2 shall continue to be maximum at 100% of Tier I capital.
Three pillars The revised framework is based on three important aspects called three pillars which include (a) minimum capital requirement, (b) supervisory review and (c) market discipline.
1st pillar: Minimum Capital Requirement
The first pillar relates to minimum capital requirement for credit risk, operational risk and trading book issues including market risk.
CREDIT RISK : here are two approaches for providing capital against credit risk which include
Standardised Approach and Internal Risk Based (IRB) Approach. IRB approach could be either foundation IRB approach or advanced IRB approach.
MARKET RISK OR TRADING BOOK : For market/trading book risk, the external credit assessment-specific risk, the capital requirement would be rating and maturity based.
OPERATIONAL RISK: Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. This does not include strategic and reputational risk. Some factors for operational risk could be lack of competent management and/or proper planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated systems, non-compliance, programming errors, failure of computer systems, increased competition, deficiency in loan documentation etc.
2nd Pillar - Supervisory Review Process: Supervisory review process is intended to ensure that banks have adequate capital to support all the risk in their business and encourage them to develop and use better risk management techniques in monitoring and managing their risk. This process ensures that the bank managements develop internal risk capital assessment process and set capital target, commensurate with bank's risk profile and control environment.
3rd Pillar - Market Discipline : The objective of 3rd pillar is to complement the minimum capital requirement and supervisory review process through various kinds of disclosures (on semi-annual basis). Implementation in India
In India, RBI has desired the banks to submit their plan for implementation of the Basel II Accord, by December 2004. The majority of the banks in India are already having much higher level of capital adequacy and relatively comfortable level of NPAs, due to which the banking system on the whole, may not find it very difficult, to implement the new capital accord
:SugarwareZ-191: :SugarwareZ-191: :SugarwareZ-191:
The Committee circulated the revised version during June 2004 (called Accord II), for adoption by the Central Banks in different parts of the world according to priorities of the respective central banks. The fundamental objective behind this revision is to further strengthen the soundness and stability of the international banking system. The committee expects its implementation, in stages, to commence from end 2006.
Focus : A significant innovation of the new framework is the greater use of assessment of risk provided by banks' internal systems as inputs for capital calculation. Being more risk sensitive than the 1988 Accord, it is believed that this will lead to adoption of stronger risk management practices by the banking industry world over, which will be a major advantage for the financial markets.
Capital requirement /ratio: Under the Accord, the capital requirement (called capital charge) is to be calculated for credit, market and operational risk. While the definition of regulatory capital remains same (Tier I and II), the measurement of risk assets has been modified for credit risk and operational risk but for market risk there is no change. The minimum requirement continues to be 8% calculated as : Capital Fund (Tier I & II) / (Credit risk + market risk + operational risk). Tier 2 shall continue to be maximum at 100% of Tier I capital.
Three pillars The revised framework is based on three important aspects called three pillars which include (a) minimum capital requirement, (b) supervisory review and (c) market discipline.
1st pillar: Minimum Capital Requirement
The first pillar relates to minimum capital requirement for credit risk, operational risk and trading book issues including market risk.
CREDIT RISK : here are two approaches for providing capital against credit risk which include
Standardised Approach and Internal Risk Based (IRB) Approach. IRB approach could be either foundation IRB approach or advanced IRB approach.
MARKET RISK OR TRADING BOOK : For market/trading book risk, the external credit assessment-specific risk, the capital requirement would be rating and maturity based.
OPERATIONAL RISK: Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. This does not include strategic and reputational risk. Some factors for operational risk could be lack of competent management and/or proper planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated systems, non-compliance, programming errors, failure of computer systems, increased competition, deficiency in loan documentation etc.
2nd Pillar - Supervisory Review Process: Supervisory review process is intended to ensure that banks have adequate capital to support all the risk in their business and encourage them to develop and use better risk management techniques in monitoring and managing their risk. This process ensures that the bank managements develop internal risk capital assessment process and set capital target, commensurate with bank's risk profile and control environment.
3rd Pillar - Market Discipline : The objective of 3rd pillar is to complement the minimum capital requirement and supervisory review process through various kinds of disclosures (on semi-annual basis). Implementation in India
In India, RBI has desired the banks to submit their plan for implementation of the Basel II Accord, by December 2004. The majority of the banks in India are already having much higher level of capital adequacy and relatively comfortable level of NPAs, due to which the banking system on the whole, may not find it very difficult, to implement the new capital accord
:SugarwareZ-191: :SugarwareZ-191: :SugarwareZ-191:
